DRIPs and DSPPs

My brother had successful careers in teaching and social work, both of which provided a retirement pension.  He supplemented his retirement savings by starting a dividend reinvestment plan (DRIP) about the same time he started a family.  His reasons for DRIP investing are that he hates paying brokerage fees, loves picking stocks, and relies on dollar-cost-averaging to smooth market fluctuations.  It’s the classic strategy of investing disposable income on a regular basis.

The DRIP allows for making small investments, typically $20-$100, in a few shares of stock.  The investor buys an initial one or more shares through a low-cost broker with the provision that the shares be registered in the investor’s name, not the name of the broker.  The investor can then open a DRIP account and buy additional shares directly from the company.  The company automatically reinvests the dividends (1-3).  The big advantages of a DRIP account are dollar-cost-averaging and compounding returns.  The disadvantages of a DRIP are meticulous record keeping for tax purposes (1,3) and potential hidden costs of reinvestment (read the prospectus!) (1).  Not all DRIPs are available in tax-deferred accounts (3).

Direct stock purchase plans (DSPPs) allow for direct purchases of stocks from a company or the company’s transfer agent.  There may be restrictions on the minimum deposit, typically $100-$500, and when purchases can be made.  The big advantage is avoidance of brokerage fees (2,4).

References

  1. Kaye A Thomas.  Dividend reinvestment plans.  Fairmark Press Inc.  Copyright Kaye A. Thomas 1997-2013. http://fairmark.com/capgain/basis/drip.htm
  2. David and Tom Gardner.  Fool’s school: small DRIPs, big profits. The Motley Fool.  The Columbus Dispatch, 2/24/2013.
  3. Lewis Schiff.  The Millionaire’s Companion.  Armchair millionaire books, www.armchairmillionaire.com.
  4. Investopedia.  Direct Stock Purchase Plan- DSPP.  © 2013, Investopedia US, A Division of ValueClick, Inc. http://www.investopedia.com/terms/d/directstockpurchaseplan.asp#axzz2LvsePTf7
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